What volatility recently?

[easysurfer]

USA Today article:

How much risk can you handle during volatile markets?

IMO, Bring it on

The wild movements recently are nothing compared to the meltdown of 2008.

[GregLee]

No one should have a big problem with market "swings", because when your stock holdings have gone down, you just have to wait a bit for them to come back up. But wait! -- the language used to describe this situation where in a short space of time you lose a whole bunch of money, i.e. "swings", is rather misleading. A swing goes back and forth with a certain period, so that after a swing one way, you can predict a swing the other way. The market isn't really like a swing. Once you've lost a pile, it's just as likely you'll lose still more as it is that you'll recover. That's what's really frightening.

[clifp]

Quote:

Originally Posted by GregLee No one should have a big problem with market "swings", because when your stock holdings have gone down, you just have to wait a bit for them to come back up. But wait! -- the language used to describe this situation where in a short space of time you lose a whole bunch of money, i.e. "swings", is rather misleading. A swing goes back and forth with a certain period, so that after a swing one way, you can predict a swing the other way. The market isn't really like a swing. Once you've lost a pile, it's just as likely you'll lose still more as it is that you'll recover. That's what's really frightening.

While the timing of the swing isn't predictable the fact that market will have large swings over time is certainly predictable. The other important thing to keep in mind is that over long periods of time it goes up. A lot. So when the market has been going down fora long 1+ year period of time it is very likely (all but handful of years) it will go up the next years. Conversely if the market has been going up pretty steadily for 3+ years you should count on another 3 years without at least one major hiccup.

[BigNick]

Quote:

Originally Posted by GregLee Once you've lost a pile, it's just as likely you'll lose still more as it is that you'll recover. That's what's really frightening.

That would only be true if the market was a series of coin tosses, or a roulette wheel. In practice that's not true for several reasons. One is that the market doesn't exist in isolation. It does have a relationship with how the economy is doing, and what people think will happen. If it falls because, say, a lot of people think that companies are overprices in P/E terms, then after it's fallen, those conditions by definition no longer apply.

The difficulty is in predicting the inflexion point.

[tulak]

Quote:

Originally Posted by BigNick That would only be true if the market was a series of coin tosses, or a roulette wheel. In practice that's not true for several reasons. One is that the market doesn't exist in isolation. It does have a relationship with how the economy is doing, and what people think will happen. If it falls because, say, a lot of people think that companies are overprices in P/E terms, then after it's fallen, those conditions by definition no longer apply. The difficulty is in predicting the inflexion point.

This is an important point. The underlying foundation of the market are companies. That's it. When you participate in buying stocks, you are buying companies. Now you may overpay for a company, or in the case of an index fund, an aggregate of companies, but you might also underpay at times. That's what makes the market hard.

What I like about it is the fact that you are buying and selling ownership in companies. You can determine what you think is a reasonable price vs. the market. Some companies give you cash every now and then (dividends). Some take their cash and improve their business.

And of course for the ones that don't want to do all the work valuing individual companies, we buy the aggregate without discrimination in the belief that on average, companies will prosper going forward. This in turn, leads to the market increasing over time. Seems reasonable to me.

[GregLee]

Quote:

Originally Posted by kiki This in turn, leads to the market increasing over time. Seems reasonable to me.

If the market has been decreasing for a while, and you've lost a lot, perhaps you can be confident that eventually it will turn around and increase (since in the past it always has). The practical application of this principle is not obvious, though, because in the immediate future, the decline may continue, taking away more and more of your money.

[TromboneAl]

Quote:

Originally Posted by kiki Some companies give you cash every now and then (dividends). Some take their cash and improve their business. .

And some crash and burn.